A bubble of corporate debt.

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cdu7
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A bubble of corporate debt.

Post by cdu7 » Mon Nov 26, 2018 8:22 pm

https://www.nytimes.com/2018/11/26/opin ... ntributors

Corporate debt is getting out of control, is this where the next financial crisis begins?

Cycle
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Re: A bubble of corporate debt.

Post by Cycle » Mon Nov 26, 2018 8:40 pm

Fed raises rates... That will be the cause. Fed lowers rates, that will be the recovery. Exact timing impossible to determine.
Never look back unless you are planning to go that way

AlohaJoe
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Re: A bubble of corporate debt.

Post by AlohaJoe » Mon Nov 26, 2018 8:43 pm

cdu7 wrote:
Mon Nov 26, 2018 8:22 pm
https://www.nytimes.com/2018/11/26/opin ... ntributors

Corporate debt is getting out of control, is this where the next financial crisis begins?
Corporate debt may or may not be getting out of control. But nothing in that article suggests it is getting out of control. If you read that article and came away with the conclusion "corporate debt is getting out of control" then you're reading into it what you want to believe, rather than anything it actually says.

Here's what the article actually says about corporate debt: "In the last decade, the amount of corporate bonds outstanding nearly doubled to $9 trillion, from $5.5 trillion."

Is doubling from the depth's of the biggest financial crash in history a problem? Are the debt loans unserviceable? Who knows? The article certainly doesn't say. It just throws out a big number and expects readers to be scared.

"There is now nearly $2.5 trillion of United States corporate debt rated in the BBB category, close to triple the amount of 2008, making up half of the investment-grade bond market."

Again, no evidence is given that this is abnormal historically, or causes a problem when servicing debt. Just more scary big numbers. Followed by an anecdote about GE, so we know they're more interested in telling scary stories to trigger readers' emotional reactions than doing a meaningful analysis.

It looks to me like credit market debt as a percentage of networth is near a 30 year low. The last time it was lower for a sustained period of time was in the early 1980s.

Image

And it looks to me like debt service ratio hasn't changed materially over the past 5 years.

Image

I'm just not seeing any problems with corporate debt.

Grt2bOutdoors
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Re: A bubble of corporate debt.

Post by Grt2bOutdoors » Mon Nov 26, 2018 9:07 pm

What the opinion contributor fails to mention is what interest coverage ratio is, along with a few other ratios, what are the maturities of bonds outstanding are - many of these newly issued bonds are not maturing for at least 10 years. Total corporate debt issuance of $2.5 trillion, what are the revenues of those companies which have issued the debt? A bond rating today or in the future is not necessarily a death omen for a company or a sign of imminent default. Bond ratings are upgraded/downgraded with regularity over an economic cycle. The column is akin to yelling “fire” similar to the great municipal debt default Meridith Whitney proclaimed just a few short years ago, when all we see right now is some whiffs of smoke. This opinion fails the sniff test of a true credit analysis.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

TVD
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Re: A bubble of corporate debt.

Post by TVD » Mon Nov 26, 2018 9:43 pm

Funny coincidence that Real Vision had Danielle Di Martino Booth on discussing this very same concern today. I couldn't agree more. What really is unbelievable is that much of this debt was used to finance buybacks (a practice that was outlawed in the 1930s for obvious reasons until being legalized in the 1980s) which has given the US equity markets the boost not seen in the rest of the world markets.

Personally, this should be the rationale for staying away from investment grade bonds, especially investment grade bond funds.

Coupling these crazy corporate debt practices with the ginormous fiscal deficits that will be required to pull the economy out from the coming kamikaze nosedive, I believe we will finally return to the long term trend of stocks and bonds falling together. I really think people should re-evaluate common tenets (e.g. stocks and bonds are inversely correlated) holding up the typical stock-bond portfolios because I think there are sufficient ingredients for the CW being proven wrong. The coming years are going to be so interesting!!!
Last edited by TVD on Tue Nov 27, 2018 12:13 am, edited 1 time in total.

billfromct
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Re: A bubble of corporate debt.

Post by billfromct » Mon Nov 26, 2018 11:56 pm

TVD, what are "institutional grade bonds"? Bonds that are only bought by financial institutions?

I haven't heard that term before.

bill

TVD
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Re: A bubble of corporate debt.

Post by TVD » Tue Nov 27, 2018 12:15 am

billfromct wrote:
Mon Nov 26, 2018 11:56 pm
TVD, what are "institutional grade bonds"? Bonds that are only bought by financial institutions?

I haven't heard that term before.

bill
Apologies. Investment grade. The ones institutions can invest in. Corrected Brain lapse. Long work day and still going.

Valuethinker
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Re: A bubble of corporate debt.

Post by Valuethinker » Tue Nov 27, 2018 5:10 am

TVD wrote:
Tue Nov 27, 2018 12:15 am
billfromct wrote:
Mon Nov 26, 2018 11:56 pm
TVD, what are "institutional grade bonds"? Bonds that are only bought by financial institutions?

I haven't heard that term before.

bill
Apologies. Investment grade. The ones institutions can invest in. Corrected Brain lapse. Long work day and still going.
Technically institutions can invest in non investment grade bonds? They just have to do so through separate funds which defined themselves as HY funds?

It's "Investment grade bond funds" that have to sell when downgraded below BBB-?

(there may be rules re pension funds & insurance companies using bonds to offset their liabilities - that's maybe where the "institutional grade" thinking came in?).

Valuethinker
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Re: A bubble of corporate debt.

Post by Valuethinker » Tue Nov 27, 2018 5:14 am

AlohaJoe wrote:
Mon Nov 26, 2018 8:43 pm
cdu7 wrote:
Mon Nov 26, 2018 8:22 pm
https://www.nytimes.com/2018/11/26/opin ... ntributors

Corporate debt is getting out of control, is this where the next financial crisis begins?
Corporate debt may or may not be getting out of control. But nothing in that article suggests it is getting out of control. If you read that article and came away with the conclusion "corporate debt is getting out of control" then you're reading into it what you want to believe, rather than anything it actually says.

Here's what the article actually says about corporate debt: "In the last decade, the amount of corporate bonds outstanding nearly doubled to $9 trillion, from $5.5 trillion."

Is doubling from the depth's of the biggest financial crash in history a problem? Are the debt loans unserviceable? Who knows? The article certainly doesn't say. It just throws out a big number and expects readers to be scared.

"There is now nearly $2.5 trillion of United States corporate debt rated in the BBB category, close to triple the amount of 2008, making up half of the investment-grade bond market."

Again, no evidence is given that this is abnormal historically, or causes a problem when servicing debt. Just more scary big numbers. Followed by an anecdote about GE, so we know they're more interested in telling scary stories to trigger readers' emotional reactions than doing a meaningful analysis.

It looks to me like credit market debt as a percentage of networth is near a 30 year low. The last time it was lower for a sustained period of time was in the early 1980s.

Image

And it looks to me like debt service ratio hasn't changed materially over the past 5 years.

Image

I'm just not seeing any problems with corporate debt.
There's been a migration down in credit quality, I think that is clear. The BBB (lowest grade of investment grade) share of the bond market has increased, greatly?

Something like 80% of investment grade corporate bonds are now "cov lite" (for a 3rd party reader, meaning the usual investor protections are weakened or absent)?

And interest rates are now rising, which will hit DSCR (EBITDA/ (interest + repayment)) and interest cover, over time - if not for the bonds then for the floating rate loans companies often also have.

None of this is apocalyptic *if* the economy keeps growing.

A general feeling here (in Europe) from people who lend money that we are near the top of the credit cycle - more money lent on looser terms. It will come back to bite us.

nordsteve
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Re: A bubble of corporate debt.

Post by nordsteve » Tue Nov 27, 2018 8:41 am

We are ten years into a period of incredibly low interest rates. Companies pay attention to their costs of capital, have a choice, and with debt very cheap that's what they've been using.

https://www.mckinsey.com/business-funct ... t-strategy has a good discussion of capital structure and how it integrates with overall company strategy.

JBTX
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Re: A bubble of corporate debt.

Post by JBTX » Tue Nov 27, 2018 5:39 pm

https://www.moodysanalytics.com/-/media ... to-gdp.pdf

It is high, but not out of control. A 5% of GDP increase (40 to 45% ) in corporate debt isn't going to crash the economy. To put in context, household debt to GDP went from about 70% around 2000 to 100% by 2006. Now it is back to around 80%.

While corporate debt is higher than average, some of the big companies are sitting on near record levels of cash.

alex_686
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Re: A bubble of corporate debt.

Post by alex_686 » Tue Nov 27, 2018 5:50 pm

TVD wrote:
Mon Nov 26, 2018 9:43 pm
What really is unbelievable is that much of this debt was used to finance buybacks (a practice that was outlawed in the 1930s for obvious reasons until being legalized in the 1980s) which has given the US equity markets the boost not seen in the rest of the world markets.
So corporations are exchanging the high cost of equity financing for the low cost debt, lowering their weighed average cost of capital? And this is indefensible how?

The biggest issue with buy-backs are agency issues - that is insider trading. I will point to the 1950s Modigliani–Miller theorem (foundation bit of investment finance theory, winner of a Nobel prize.)

JBTX
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Re: A bubble of corporate debt.

Post by JBTX » Tue Nov 27, 2018 5:57 pm

alex_686 wrote:
Tue Nov 27, 2018 5:50 pm
TVD wrote:
Mon Nov 26, 2018 9:43 pm
What really is unbelievable is that much of this debt was used to finance buybacks (a practice that was outlawed in the 1930s for obvious reasons until being legalized in the 1980s) which has given the US equity markets the boost not seen in the rest of the world markets.
So corporations are exchanging the high cost of equity financing for the low cost debt, lowering their weighed average cost of capital? And this is indefensible how?

The biggest issue with buy-backs are agency issues - that is insider trading. I will point to the 1950s Modigliani–Miller theorem (foundation bit of investment finance theory, winner of a Nobel prize.)
I generally agree with you. But the flip side is some may be buying more stock to increase EPS, and juice up their executive bonus comp.

alex_686
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Re: A bubble of corporate debt.

Post by alex_686 » Tue Nov 27, 2018 6:02 pm

JBTX wrote:
Tue Nov 27, 2018 5:57 pm
I generally agree with you. But the flip side is some may be buying more stock to increase EPS, and juice up their executive bonus comp.
Give me any system to compensate managers and I can show you how to game that system. The board of directors is supposed to know this trick and structure bonus payouts to prevent this.

JBTX
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Re: A bubble of corporate debt.

Post by JBTX » Tue Nov 27, 2018 9:17 pm

alex_686 wrote:
Tue Nov 27, 2018 6:02 pm
JBTX wrote:
Tue Nov 27, 2018 5:57 pm
I generally agree with you. But the flip side is some may be buying more stock to increase EPS, and juice up their executive bonus comp.
Give me any system to compensate managers and I can show you how to game that system. The board of directors is supposed to know this trick and structure bonus payouts to prevent this.
The BOD often have little incentive to do that. It is like a club. You scratch my back I'll scratch yours.

TVD
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Re: A bubble of corporate debt.

Post by TVD » Tue Nov 27, 2018 9:41 pm

Valuethinker wrote:
Tue Nov 27, 2018 5:10 am
TVD wrote:
Tue Nov 27, 2018 12:15 am
billfromct wrote:
Mon Nov 26, 2018 11:56 pm
TVD, what are "institutional grade bonds"? Bonds that are only bought by financial institutions?

I haven't heard that term before.

bill
Apologies. Investment grade. The ones institutions can invest in. Corrected Brain lapse. Long work day and still going.
Technically institutions can invest in non investment grade bonds? They just have to do so through separate funds which defined themselves as HY funds?

It's "Investment grade bond funds" that have to sell when downgraded below BBB-?

(there may be rules re pension funds & insurance companies using bonds to offset their liabilities - that's maybe where the "institutional grade" thinking came in?).
Yes. Correct. Thanks.

corpgator
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Re: A bubble of corporate debt.

Post by corpgator » Tue Nov 27, 2018 10:06 pm

alex_686 wrote:
Tue Nov 27, 2018 5:50 pm
TVD wrote:
Mon Nov 26, 2018 9:43 pm
What really is unbelievable is that much of this debt was used to finance buybacks (a practice that was outlawed in the 1930s for obvious reasons until being legalized in the 1980s) which has given the US equity markets the boost not seen in the rest of the world markets.
So corporations are exchanging the high cost of equity financing for the low cost debt, lowering their weighed average cost of capital? And this is indefensible how?

The biggest issue with buy-backs are agency issues - that is insider trading. I will point to the 1950s Modigliani–Miller theorem (foundation bit of investment finance theory, winner of a Nobel prize.)
A good example is GM. They have done $14 billion in share buybacks over the last 4 years and they will be borrowing money to fund a pivot more towards electric vehicles, closing plants, and laying off workers. Had share buybacks still been illegal, they wouldn't need to borrow money and instead would have been investing what they already had. Plenty of other examples as well including a may soon to be bankrupt GE.

TVD
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Re: A bubble of corporate debt.

Post by TVD » Tue Nov 27, 2018 10:19 pm

alex_686 wrote:
Tue Nov 27, 2018 5:50 pm
TVD wrote:
Mon Nov 26, 2018 9:43 pm
What really is unbelievable is that much of this debt was used to finance buybacks (a practice that was outlawed in the 1930s for obvious reasons until being legalized in the 1980s) which has given the US equity markets the boost not seen in the rest of the world markets.
So corporations are exchanging the high cost of equity financing for the low cost debt, lowering their weighed average cost of capital? And this is indefensible how?

The biggest issue with buy-backs are agency issues - that is insider trading. I will point to the 1950s Modigliani–Miller theorem (foundation bit of investment finance theory, winner of a Nobel prize.)
Trying my best not to say anything inflammatory that would lock down this thread but I question the moral and ethical standards of the majority of corporate buybacks currently.

The insiders (i.e C suite execs) are increasing corporate debt to increase stock buy backs which increases the EPS so these people can meet their targets. Furthermore, many of these insiders are selling their own shares during this buy back process thereby enriching the C level execs and making stockholders nothing more than bagholders. But I must ask:

Is it proper management to be buying back stock, when stock valuations (and median S&P) valuations have been at the top 95% if not all time top (depending on metric used) of all recorded stock market valuations?

What is the purpose of expending these buybacks when capex growth has been relatively stagnant for the last 10 years?

Why can't these managers increase profitability, build buisnesses, create new business etc rather than buying back shares to increase EPS in order to meet their targets?

What happens when interest rates rise and it becomes more difficult to finance the corporate debt used for the buybacks with the minimal increases in company cash flow over the last 10 years?

If the C suite really believes the company is undervalued and buybacks are cheap, why are they selling their own shares?

But, here is where it matters to my bottom line. It has been estimated that 30% of the S&P gains over the last 5-10 years were due to stock buy backs. This has decreased the current floating shares. What happens when there are substantially fewer shares outstanding and we hit a bear market (which we started in Oct 3, 2018), and everyone capitulates and panic sells? What happened in the middle of October 2018 when there was a blackout period for buybacks due to earnings reports? What will happen in January 2019, when the current impetus for buybacks (i.e. the tax bill) ends? Is it a connection between 2018 being the high level of buybacks and the same year that the S&P was rising over 2018 while equity markets in the rest of the world have fallen >30%?

Was there some possible reason that buybacks were illegal until 1982. Nothing is ever really different.

I can go on...

Theoretical
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Re: A bubble of corporate debt.

Post by Theoretical » Wed Nov 28, 2018 12:10 am

TVD wrote:
Tue Nov 27, 2018 10:19 pm
alex_686 wrote:
Tue Nov 27, 2018 5:50 pm
TVD wrote:
Mon Nov 26, 2018 9:43 pm
What really is unbelievable is that much of this debt was used to finance buybacks (a practice that was outlawed in the 1930s for obvious reasons until being legalized in the 1980s) which has given the US equity markets the boost not seen in the rest of the world markets.
So corporations are exchanging the high cost of equity financing for the low cost debt, lowering their weighed average cost of capital? And this is indefensible how?

The biggest issue with buy-backs are agency issues - that is insider trading. I will point to the 1950s Modigliani–Miller theorem (foundation bit of investment finance theory, winner of a Nobel prize.)
Trying my best not to say anything inflammatory that would lock down this thread but I question the moral and ethical standards of the majority of corporate buybacks currently.

The insiders (i.e C suite execs) are increasing corporate debt to increase stock buy backs which increases the EPS so these people can meet their targets. Furthermore, many of these insiders are selling their own shares during this buy back process thereby enriching the C level execs and making stockholders nothing more than bagholders. But I must ask:

Is it proper management to be buying back stock, when stock valuations (and median S&P) valuations have been at the top 95% if not all time top (depending on metric used) of all recorded stock market valuations?

What is the purpose of expending these buybacks when capex growth has been relatively stagnant for the last 10 years?

Why can't these managers increase profitability, build buisnesses, create new business etc rather than buying back shares to increase EPS in order to meet their targets?

What happens when interest rates rise and it becomes more difficult to finance the corporate debt used for the buybacks with the minimal increases in company cash flow over the last 10 years?

If the C suite really believes the company is undervalued and buybacks are cheap, why are they selling their own shares?

But, here is where it matters to my bottom line. It has been estimated that 30% of the S&P gains over the last 5-10 years were due to stock buy backs. This has decreased the current floating shares. What happens when there are substantially fewer shares outstanding and we hit a bear market (which we started in Oct 3, 2018), and everyone capitulates and panic sells? What happened in the middle of October 2018 when there was a blackout period for buybacks due to earnings reports? What will happen in January 2019, when the current impetus for buybacks (i.e. the tax bill) ends? Is it a connection between 2018 being the high level of buybacks and the same year that the S&P was rising over 2018 while equity markets in the rest of the world have fallen >30%?

Was there some possible reason that buybacks were illegal until 1982. Nothing is ever really different.

I can go on...
I think you're right on the money. Corporate debt is way into the BBB category, and all it will take is a recession to trip a whole bunch of them into downgrade territory. Fallen angel bond funds will feast on the upside, but I think it's going to be a real mess when the downgrades happen.

Mimmz
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Re: A bubble of corporate debt.

Post by Mimmz » Wed Nov 28, 2018 12:26 am

There’s also the impact these trends have closer to Main Street - I spend my time in generally unrated credit for smaller businesses than this article addresses, that if rated would likely receive B to CCC type ratings.

The terms have indeed loosened significantly over the recent history, the leverage available has increased, and the coverage ratios have declined materially. While I feel that “bubble” has become a bit overused since the last recession, we are certainly at a frightening inflection point in the credit cycle, and the sources of capital for much of this debt do not appear to have the stability one would expect for the positions they hold in the capital structures of many businesses.

Valuethinker
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Re: A bubble of corporate debt.

Post by Valuethinker » Wed Nov 28, 2018 4:13 am

TVD wrote:
Tue Nov 27, 2018 10:19 pm


Was there some possible reason that buybacks were illegal until 1982. Nothing is ever really different.

I can go on...
Michael Jensen Free Cash Flow Theory of the Firm. The corporate governance revolution. Mobil bought a department store. US Steel bought an oil company. etc.

Managers were very poor users of shareholders free cash flow.

Thus buybacks as a way of making more efficient use of shareholder funds. The bubble wrap company (mind gone blank) was the classic example - effectively LBO'd themselves to encourage corporate transformation via a massive share buyback and high gearing.

Jensen himself has said that executive remuneration (via shareholder aligned incentives) then exploded far above what he imagined it would have.

I think the main reason buybacks were illegal was tax. The other was, of course, the protection of creditors.

Share buybacks give rise to capital gains tax. Dividends give rise to income tax. IRS argued buybacks were just a form of tax avoidance.

MGator
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Re: A bubble of corporate debt.

Post by MGator » Wed Nov 28, 2018 5:52 am

TVD wrote:
Tue Nov 27, 2018 10:19 pm
alex_686 wrote:
Tue Nov 27, 2018 5:50 pm
TVD wrote:
Mon Nov 26, 2018 9:43 pm
What really is unbelievable is that much of this debt was used to finance buybacks (a practice that was outlawed in the 1930s for obvious reasons until being legalized in the 1980s) which has given the US equity markets the boost not seen in the rest of the world markets.
So corporations are exchanging the high cost of equity financing for the low cost debt, lowering their weighed average cost of capital? And this is indefensible how?

The biggest issue with buy-backs are agency issues - that is insider trading. I will point to the 1950s Modigliani–Miller theorem (foundation bit of investment finance theory, winner of a Nobel prize.)
Trying my best not to say anything inflammatory that would lock down this thread but I question the moral and ethical standards of the majority of corporate buybacks currently.

The insiders (i.e C suite execs) are increasing corporate debt to increase stock buy backs which increases the EPS so these people can meet their targets. Furthermore, many of these insiders are selling their own shares during this buy back process thereby enriching the C level execs and making stockholders nothing more than bagholders. But I must ask:

Is it proper management to be buying back stock, when stock valuations (and median S&P) valuations have been at the top 95% if not all time top (depending on metric used) of all recorded stock market valuations? It's all about incentives and capital allocation priorities at the company.

What is the purpose of expending these buybacks when capex growth has been relatively stagnant for the last 10 years? What's the incremental return on that dollar of Capex versus the buyback? What's the payback period on this capital? Manager incentives are what you need to look at - this drives behavior at corporations.

Why can't these managers increase profitability, build buisnesses, create new business etc rather than buying back shares to increase EPS in order to meet their targets? Some can, many can't. There are great management teams and there are poor management teams. Not all companies can win.

What happens when interest rates rise and it becomes more difficult to finance the corporate debt used for the buybacks with the minimal increases in company cash flow over the last 10 years? More a question of refinancing the debt that was recently issued; however many of these companies that have issued debt have done so with longer dated tenors

If the C suite really believes the company is undervalued and buybacks are cheap, why are they selling their own shares? There are a variety of reasons, many personal - some own a large portion of the company and are diversifying their wealth, others live extravagantly and have to pay bills, while some have questionable ethical and moral standards

But, here is where it matters to my bottom line. It has been estimated that 30% of the S&P gains over the last 5-10 years were due to stock buy backs. This has decreased the current floating shares. What happens when there are substantially fewer shares outstanding and we hit a bear market (which we started in Oct 3, 2018), and everyone capitulates and panic sells? What happened in the middle of October 2018 when there was a blackout period for buybacks due to earnings reports? What will happen in January 2019, when the current impetus for buybacks (i.e. the tax bill) ends? Is it a connection between 2018 being the high level of buybacks and the same year that the S&P was rising over 2018 while equity markets in the rest of the world have fallen >30%? We will see but these are all good points.

Was there some possible reason that buybacks were illegal until 1982. Nothing is ever really different.

I can go on...

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F150HD
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Re: A bubble of corporate debt.

Post by F150HD » Wed Nov 28, 2018 6:44 am

"...AT&T has $181 billion in debt. It’s easily the most indebted company in the U.S. (and possibly the world), adding lots of it with its recent misadventures into media and entertainment."

Found this interesting.
Long is the way and hard, that out of Hell leads up to light.

Bacchus01
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Re: A bubble of corporate debt.

Post by Bacchus01 » Wed Nov 28, 2018 6:50 am

nordsteve wrote:
Tue Nov 27, 2018 8:41 am
We are ten years into a period of incredibly low interest rates. Companies pay attention to their costs of capital, have a choice, and with debt very cheap that's what they've been using.

https://www.mckinsey.com/business-funct ... t-strategy has a good discussion of capital structure and how it integrates with overall company strategy.
This. Rates are low. Rates on outstanding bonds will remain low for a decade or more. If you can acquire capital at <2%, why wouldn’t you choose that route?

Grt2bOutdoors
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Location: New York

Re: A bubble of corporate debt.

Post by Grt2bOutdoors » Wed Nov 28, 2018 7:10 am

Valuethinker wrote:
Wed Nov 28, 2018 4:13 am
TVD wrote:
Tue Nov 27, 2018 10:19 pm


Was there some possible reason that buybacks were illegal until 1982. Nothing is ever really different.

I can go on...
Michael Jensen Free Cash Flow Theory of the Firm. The corporate governance revolution. Mobil bought a department store. US Steel bought an oil company. etc.

Managers were very poor users of shareholders free cash flow.

Thus buybacks as a way of making more efficient use of shareholder funds. The bubble wrap company (mind gone blank) was the classic example - effectively LBO'd themselves to encourage corporate transformation via a massive share buyback and high gearing.

Jensen himself has said that executive remuneration (via shareholder aligned incentives) then exploded far above what he imagined it would have.

I think the main reason buybacks were illegal was tax. The other was, of course, the protection of creditors.

Share buybacks give rise to capital gains tax. Dividends give rise to income tax. IRS argued buybacks were just a form of tax avoidance.
Bubble wrap company - SealedAir.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

jtelwood
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Corporate debt bubble

Post by jtelwood » Wed Nov 28, 2018 9:15 am

[merged this post and its replies into the existing thread - moderator prudent]

I have recently read, as I suspect many of you as well, about the rising concern for the amount of debt many well established companies have taken on - G.E., AT&T, CVS Health, Sherwin-Williams Campbell Soup, etc. As interest rates rise and the economy eventually slows, many companies could be in danger of defaulting on their debt. The article goes on to say that a fear has started to cause disturbing ripples in the debt and equity markets.

My question - what kind of changes to one's portfolio would be prudent to consider, if any?

Appreciate any thoughts or comments.

jte

Snowjob
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Re: A bubble of corporate debt.

Post by Snowjob » Wed Nov 28, 2018 10:05 am

Coincidental timing --

CNBC had a guy on last night who was saying 14% of the S&P 500 couldn't service their debt-load with the next 3 years EBITDA. (how much of that energy /basic materials companies in a tough spot, I don't know).

That gentleman's prediction was a slowing economy and then a recession followed by some corporate defaults and restructurings due to the debt-loads of some.

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corn18
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Re: Corporate debt bubble

Post by corn18 » Wed Nov 28, 2018 10:29 am

My IPS doesn't care what is going on in the market other than rebalancing. It's just noise.

Don't just do something, stand there!
Don't do something, just stand there!

jtelwood
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Re: Corporate debt bubble

Post by jtelwood » Wed Nov 28, 2018 11:31 am

Thanks. That's where I'm at. Just wanted to hear what other's think and why.
jte

ICH
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Re: A bubble of corporate debt.

Post by ICH » Wed Nov 28, 2018 11:31 am

Snowjob wrote:
Wed Nov 28, 2018 10:05 am
Coincidental timing --
No coincidence. It is going to happen in 2020: https://www.guggenheiminvestments.com/p ... doesnt-lie

Unless the world ends before that in which case no issue. :shock:

Valuethinker
Posts: 39215
Joined: Fri May 11, 2007 11:07 am

Re: Corporate debt bubble

Post by Valuethinker » Wed Nov 28, 2018 1:13 pm

jtelwood wrote:
Wed Nov 28, 2018 9:15 am
I have recently read, as I suspect many of you as well, about the rising concern for the amount of debt many well established companies have taken on - G.E., AT&T, CVS Health, Sherwin-Williams Campbell Soup, etc. As interest rates rise and the economy eventually slows, many companies could be in danger of defaulting on their debt. The article goes on to say that a fear has started to cause disturbing ripples in the debt and equity markets.

My question - what kind of changes to one's portfolio would be prudent to consider, if any?

Appreciate any thoughts or comments.

jte
viewtopic.php?f=10&t=264873&newpost=4232661

If you hold more US Treasury bonds you are in effect weighting your portfolio against an increase in leverage in your US equity proportion.

One problem is inherently financials are highly leveraged.

Snowjob
Posts: 1612
Joined: Sun Jun 28, 2009 10:53 pm

Re: A bubble of corporate debt.

Post by Snowjob » Wed Nov 28, 2018 1:19 pm

ICH wrote:
Wed Nov 28, 2018 11:31 am
Snowjob wrote:
Wed Nov 28, 2018 10:05 am
Coincidental timing --
No coincidence. It is going to happen in 2020: https://www.guggenheiminvestments.com/p ... doesnt-lie

Unless the world ends before that in which case no issue. :shock:
I will not accept a future that involves the world ending before I get to spend at least SOME of this retirement savings damn it.

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